Telstra's close call

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Phew, that was close. Telstra's financial results for the quarter, released on Wednesday, have got chief executive Ziggy Switkowski off the hook. For now. Sales were up 3 per cent to $5billion for the quarter year, broadband growth was up by 100per cent and its share of the mobile phone market was up.

Switkowski was looking exposed after chairman Bob Mansfield was led off muttering about disloyalty and what might have been. Meantime, Rupert Murdoch seems to be waiting to see if Telstra is forced to divest its share of Foxtel.

Mark Latham has made it clear that no privatisation would happen under a Labor government and that Telstra would have to sell its half stake in Foxtel. This could give Murdoch a leg-up into telecom services, such as broadband, as he has done with BSkyB in Britain. It's quite a corporate soap opera.

Some Telstra watchers are wondering if the company knows what it's doing after paying $1billion for The Trading Post and software company Kaz.

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The market wants Telstra to get back to basics, forget buying up media and put more money in shareholders' pockets.

Telstra's dilemma is balancing the future and the past. It wants to defend its patch as the Government tries to break its near monopoly of the telephone network, while trying to maintain its dominance in a dynamic industry. Getting a handle on the future is the challenge.

Where does this leave shareholders? T2 investors have seen the share price nearly halve. At least the price is heading in the right direction for new investors and the stock is paying a solid dividend. Share prices fluctuate but it's the dividend that is the big attraction at the moment for "mum and dad" investors. The question is whether it's big enough and whether the present team is ensuring dividends for the future.

Perennial Value Management managing director John Murray would not include Telstra in his 10 best stocks. But he wouldn't talk existing shareholders into selling "because it's one of the better yielding stocks".

"At the current share price of around $4.70, Telstra offers a healthy dividend yield of 5.5 per cent, which equates to a pre-tax yield of 7.9 per cent if you also take into account the franking (tax) credit benefits," he said. "The resignation of Bob Mansfield also suggests that Telstra will be focusing less on growth opportunities and more on improving its core business."

Perpetual Investors also thinks investors can do better than Telstra, which

it believes could give more back to shareholders with better capital management. Chief investment officer Emilio Gonzales said: "Telstra's profit margins are slowly being eaten away.

The trouble is it is trying to be a growth stock when it is not. The danger is you end up spending money on acquiring (new businesses that promise growth) when you should not."

Andrew Brown, of Trent Capital,

said Telstra had used excess profit to acquire businesses instead of channelling it back to shareholders as larger dividends and other payments. "The question for investors is: are those investments to buy future growth likely to pay off?" he said. "Telstra's low share price shows the sharemarket is cynical about the company's ability to do that."

The good news

Despite his recent high-profile difficulties, Telstra chief Ziggy Switkowski says his and the company's future are intertwined. Whichever way you look at it, he says, things are rosy.

"I've absolutely no intention of walking away from this job," he said. "I mean, across the company our operations are lifting and the industry is healthy and it's growing. The outlook at Telstra is promising."

However, if Telstra does not hit domestic growth of 4 to 5 per cent by 2006 he expects his job to be at risk. "I've put that line in the sand. It's clear, it's unambiguous, it's not qualified ... in the 2006 calendar year, we'll have taken the company to be moving towards achieving industry growth rates of around 4or 5 per cent," he says.

"I'm accountable to delivering on that performance. If I were to fall short, my job would clearly be at risk."

Telstra says the number of broadband subscribers has jumped by 113 per cent to 617,000 in the third quarter, while narrowband subscribers have increased 5.6 per cent to 1,197,000.

The bad news

The telco is fighting foes on a number of fronts.

Growth: Telstra saw off the first wave of phone competitors but industry consolidation has meant new companies are taking customers. While Telstra has a near monopoly of fixed-line phone links, it has only 50 per cent of mobiles.

Deflation: There is a deflationary element in new technology and sales. Prices are falling and the push to data and voice-over internet is a long-term threat. Corporates are taking the opportunity to cut their telco bills. "I just can't see where telecoms can grow sales faster than the economy as a whole," Wilson Leaders director Justin Braitling says.

Capital: "They have under-invested with capital for many, many years," Mr Braitling says. "That puts them in a bad position compared with Deutsche Telekom, which has over-invested in upgrading for digital technology."

Maintenance: Telstra can't afford to cut back on capital spending because its maintenance bill is high and faults are going through the roof. The BigPond internet blackouts are a symptom of how they have not built up the capacity.

"Telstra has not worked out that its sales are under real pressure," Mr Braitling says. "They are trying to buy other businesses and hope the increased data business will save them. But they have under-invested in infrastructure to cope."